Mine accounting and cost principles

Preface

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The present tax laws of most of the States and of the Federal Govern-

j < ment require that accurate records be kept and that complete reports be

" made to the Government of the results of each year's business. The em-

£ ployes of large industrial units are demanding that they be informed of

3 the results of their labor, and be given a share either of the profits of

the business or in the savings resulting from their increased efficiency

or effort. The general public is insisting that, being the consumer of all

products, the costs and profits of industry shall be accurately determined

and made public. As the result of the gradual depletion of our richest

5 deposits of minerals the mining industry is operating on a narrower

n margin of profit than at any time in its history, and must know its costs

gfrom month to month to protect against loss. Also, it is now recognized

"^that a mining enterprise may be properly equipped with the best of

mechanical appliances and have an organization of high ability and

employes embued with the spirit of co-operation, nevertheless the

business cannot be intelligently managed without a knowledge of the

results of operation and the condition of the business for each operating

_, period, which information can be obtained only by proper accounting and

3 o costing.

Therefore, each unit of the mining industry feels the need not only

■j^of accurately determining its costs and profits so as to have an intelligent

guide to operations, and to meet the requirements of the Government,

the public and of its employes, but to compile the accounting and costing

data in as uniform a manner as possible so as to obtain the benefit of

the operating data compiled by the other units of the industry.

To meet this need there is an urgent demand for a complete presentation of accounting and costing of mining operations compiled on a scientific basis and in a uniform manner.

In spite of this demand, however, at the present time the published literature is inadequate and lacking in uniformity and there is practically no agreement nor any great degree of efficiency in the accounting and costing practice of mines. The only explanation of the present status of mine accounting is that the great diversity in methods of mining, treatment and disposal of mine products, as well as in the character of the mines themselves limits the treatment of the subject to a description of individual systems and accounts unless the fundamental principles underlying all mining operations are recognized.

Up to date there have been two principal methods of illustrating accounting procedure: one, by means of books and records used in the business, and the other by means of accounts and statements used in

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VI PREFACE

the business. When the first method is used there is explained how the books are kept in order to get a Balance Sheet and a Profit and Loss, or Income Statement. When the second method is used the balance sheet and the profit and loss account are taken as the basis and there is explained what should enter into these and subsidiary accounts, and what records should be kept to support the balance sheet and profit and loss or income account.

While it is true that the two principal objects of accounting are, to obtain a balance sheet showing the condition of the business at the end of the operating period, and, a profit and loss statement showing the results of the period's operation, nevertheless these two statements are only the results of the accounting and are not the basis of the accounting. Neither are the books the basis of the accounting as they are only part of the accounting machinery. While the accounts are the basis of the accounting they will show the true condition of the business only when they have been created in harmony with the principles underlying the business.

In this presentation of General and Cost Accounting, a new method has been used: First, in order to determine the basis of the accounting, the business has been analyzed and a statement of the principles of the mining business has been drawn; second, charts of accounts have been created that will correctly reflect these principles upon the ledger; third, schedules are drawn showing the charges and credits to these accounts to insure uniformity and correctness; fourth, books and records are created that will allow of the compiling of the operating and business data so as to give a balance sheet showing the true condition of the business and an income or profit and loss statement that will give the results of the period's operation. The accounting procedure is then handled in the order in which the business is done.

It is believed that the correct basis of accounting for mining has been presented herein and that this basis will allow of uniformity in accounting and costing procedure for all mines regardless of operating methods or the character of the ores treated. To achieve such uniformity would result in great benefit to the mining industry and in the directors, managers and department heads comprehending the business from an accounting standpoint as well as from the angle of operations.

The object has not been to endeavor to exhaust the subject of accounting and costing as applied to mining, nor to present the different systems and methods now in use by mines, mills and smelters, but simply to state the principles and to present sufficient forms, charts, records and procedure to illustrate how the principles are applied in actual practice. Also the subject has been worked out in the form of a manual and each sub-division is taken in logical order which should make the book of more value to those who wish practical working knowledge of mine accounting.

The Business of Mining 1

Relationship of Accounting to the Business 2

Organization of the Business 4

Definition of Accounting Terms. . 5

Need for Better Understanding of Accounting 5

CHAPTER II Purpose of Accounting 7

Organization of Accounting Department 8

Principles of General Accounting 10

Chart of Accounts 11

Schedules of Charges and Credits 12

Differences in Mining Methods, Etc 12

Forms and Procedure 13

Accounting Divisions 13

Stages of Operation 14

CHAPTER III Capital, Promotion and Organization

Capital for Prospecting 16

Determining the Capitalization 16

Organizing the Business 17

Capital Receipts 17

Capital Expense 22

Statement of Condition of Business 23

CHAPTER IV Operating Organization 25

Operating Accounting Department 25

Operating Accounting 26

Books of Record 26

General Accounts 26

vii viii CONTENTS

Page

Operating Disbursements and Receipts 27

Net Mine Development 28

Depreciation of Development Equipment 29

Closing Mine Development Account 29

Administrative Accounting 30

Administrative Mine Development 31

Crediting Operations with Mine Development 31

The Development Stage 32

Development Production Accounting 33

CHAPTER V Capital, Reorganization and Development

Reorganization of Development Company 34

Determining the Capitalization 34

Reorganization Accounting 35

CHAPTER VI Operating General Accounting Chart of Operating Accounts 42

Basis of Accounting 44

Operating Production Accounting 44

Divisions of Production Accounting 45

Operating Capital 46

Statement at Beginning of Production 46

Operating Exploration and Development 47

Capital Disbursements During Production 48

Chart of Operating Principles 48

CHAPTER VII Actual Disbursements — Direct 52

Employment of Labor 52

Labor Reports 53

Check of Daily Labor Reports 54

Record of Labor Reports 54

Accidents 56

Orders and Deductions 57

Balancing Pay Rolls 57

Time Statements and Payments 57

Labor Disbursement Account 57

Invoices and Freight Bills 60

Cash Discounts and Credits 61

CONTENTS IX

Page

Bills of Expense 61

Check of Invoices, Etc 61

Vouchers 61

Bills Audited Record 61

Check of Bills Audited Record 63

Voucher Cheque 63

Bills Audited Disbursement Account •. . 63

Disbursements of Supplies 64

Report of Supplies Issued 64

Record of Supplies Issued 65

Handling 66

Check of Supplies Issued 67

Supplies Issued Disbursement Account 67

Summary of Direct Disbursements 68

Actual Disbursements — Indirect 68

Summary of Actual Disbursements 70

Accrued and Deferred Disbursements 70

Accrued Disbursements 70

Deferred Disbursements 71

Summary of Disbursements 74

CHAPTER VIII Distribution of Direct Disbursements 77

Distribution of Indirect Disbursements 78

Distribution of Accrued Disbursements 79

Distribution of Prepaid Expense 80

Distribution of Deferred Disbursements 81

Miscellaneous Credits and Charges 82

Summary of Disbursement Charges 82

CHAPTER IX Production Production Accounts 84

Inventory of Production 84

Production Methods 87

X CONTENTS

Page

Mine Production 87

Report of Mine Production 88

Record of Ores Loaded and Shipped 89

Contents of Ores Sampled for Treatment 91

Record of Smelter Settlements for Ore Sampled 93

Production Record of By-products 96

Production of Secondary Products 97

Mill Production 99

Smelter Production 99

Refinery Production 101

CHAPTER X Sales of Principal Production 103

Sales of Secondary Production 106

Sales of By-products 107

Sales of Operating Supplies, Etc 107

Undelivered Sold Production 107

CHAPTER XI Delivery of Sales of Principal Production 110

Reserve for Loss on Sales Ill

Overs and Shorts on Deliveries Ill

Delivery of Sales of By-products 112

Delivery of Secondary Products 112

Miscellaneous Receipts 113

CHAPTER XII Cash Received from Treasurer 118

Cash Received from Sales of Principal Product 118

Cash Received from Sales of Other Products 121

Cash Received from Sales of By-products 123

Cash Received from Sales of Secondary Products 123

Cash Received from Accounts Receivable, Etc 123

Postings of Cash Book Debits 123

Cash Disbursements 124

Cash Disbursements for Labor 124

Cash Disbursements for Bills Audited 125

Remittances to Treasurer 125

Postings of Cash Book Credits 126

Petty Cash Account 126

Reconcilement of Bank and Cash Account 128

Unpaid Cheques 128

CONTENTS xi CHAPTER XIII

Operating Statement & Schedules

Page

Trial Balance 129

CHAPTER XIV Statement of Actual Operating Profit or Loss 138

Comparative Statement of Operating Profit & Loss 139

Adjusting Inventory to the Books 141

Miscellaneous Adjustments 143

Adjustment of Depreciation Charges 145

Summarizing the Revenue Accounts 143

Summarizing the Expense Accounts 144

Statement of Accounts for Treasurer 144

Determining the Yearly Profit or Loss 144

Closing the Treasurer's Accounts 146

Combined Operating Profit & Loss 147

Ruling the Accounts 147

CHAPTER XV Administrative Production Accounting

Chart of Administrative Principles 153

Statement at Beginning of the Year 154

CHAPTER XVI Actual or Current Disbursements 155

Accrued Disbursements 155

Other Accrued Disbursements 157

Deferred Disbursements 158

Appreciation of Property Investment 158

Distribution of Disbursements 158

Distribution of Current Disbursements 159

Distribution of Accrued Disbursements 159

Distribution of Deferred Disbursements 160

Operating Accounts 161

Distribution of Prepaid Disbursements 161 xii CONTENTS

CHAPTER XVII Administrative Receipts and Cash

Page

Administrative Receipts » 162

Receipts on an Accrued Basis 162

Receipts on a Cash Basis 162

Administrative Cash 162

Cash Received from Sale of Stock, etc 163

Cash Received from Notes Issued 163

Cash Received from Sales of Product 163

Postings from Cash Book Debits 164

Cash Disbursements 165

Cash Disbursements for Bills Audited 165

Cash Disbursements for Dividends 165

Postings of Cash Book Credits 166

Reconcilement of Cash Account 166

Notes Receivable 167

CHAPTER XXI Balance Sheet

Grouping of Balance Sheet Items 181

Arrangement of Groups and Items , . . . 181

CONTENTS xiii

Page

Balance Sheet Statement 182

Balance Sheet Schedules 183

Invested Capital 183

Reopening the Connecting Accounts 184

Closing the Operating Accounts 185

Accounting for Holding Companies 185

Liquidation of the Business 186

SECTION 4 CHAPTER XXII Method of Cost Determination 192

Cost Principles 193

Units of Organization 193

Divisions 193

Departments, Etc 194

Schedule of Charges and Credits 195

Expense Distribution of Labor 195

Check of Labor Distribution 196

Summary of Labor Distribution 198

Posting the Labor Distributions 198

Expense Distribution of Supplies 202

Check of Supply Distributions 203

Summary of Supply Distributions 203

Postings of Supply Distributions 203

Expense Distribution of Bills Audited 203

Expense Distribution of Shops 204

Expense Distribution of Repairs 205

Expense Distribution of Replacements 206

Expense Distribution of Power 207

Boilers 207

Air Compressors 207

Electric Plant 207

Summary of Power Distribution 207

Distribution of Suspense Items, Etc 208

Determining the Development Overhead 208

Distributing the Overhead Expense 209

Cost Factors 210

Production Factors 210

Compiling the Tonnage Factors 210

Summary of Tonnage Factors 211

Summary of Final Production Factors 211

Operating Factors 213

Time 214

Xiv CONTENTS

CHAPTER XXIII Compiling the Costs Page

Kinds of Costs 215

Production Costs 215

Total and Net Production Costs 215

Division Production Costs 219

Administrative Production Costs 219

Operating Production Costs 220

Departmental Production Costs 223

Departmental Unit Costs 224

Detail Unit Costs 227

Daily and Weekly Costs 229

Comparative Costs 234

Shops and Power Costs 237

Shops Costs 238

Power Costs 240

Boiler Horse Power Costs 240

Compressor Costs 241

Air Drill Operating Costs 241

Air Drill Repair Costs 241

Cost of Prepaid Expense 242

Asset Costs 244

Construction and Equipment Costs 244

Materials and Supplies Costs 245

Accounts Receivable Costs 247

Distributing the Cost Sheets 247

Assembling the Cost Sheets 247

Statistics 248

Economic Accounting 248

Forms 248

Appendix 250

Index 255

INTRODUCTORY INTRODUCTION— GENERAL ACCOUNTING

Chapter I Introduction

The Business of Mining. — Before taking up the subject of Accounting for mining it is best to have a clear conception of the business as compared to other business ventures. While the ultimate object of the business of mining is to win a profit from operations the same as in all other lines of business, nevertheless the hazards and the nature of the business differ considerably from other industries.

In order to make these differences clear, we will set forth the principal features, as follows:

First. — The initial investment in mining claims, development and equipment must be proven by the discovery of commercial ore of a net value equal to the amount of investment before the investor can be reasonably assured of the return of his capital, which will then be subject only to the fluctuations in the metal, material and labor markets.

In other lines of business the amount of investment in merchandise, raw materials, property, etc., has a certain marketable value from the moment of purchase, and can be disposed of at any time thereafter, for the amount of capital invested therein, plus a reasonable profit, subject to fluctuations in the material and labor markets and to competition.

Second. — The income of a mine is determined principally by the amount that the net value of the ore discovered is in excess of the investment in mining claims, development and equipment, while the income of other industries is determined by the price at which the purchased or manufactured article can be sold above the cost of production, and the quickness with which the investment is turned.

Third. — It takes from three to seven years as a rule, after necessary development equipment has been installed on a mineral property, to prove the value of the property, during which time the investor stands to lose not only the interest on his money, but all or part of his principal, depending upon the amount of the net value of the commercial ore, if any, that may be discovered. Other lines of industry have the value of their investment established immediately upon the acquisition of their stock and are able, as soon as equipment necessary to handle the business can be installed, to offer their product for sale at as high a figure above the investment cost as competition and the law of supply and demand, etc., will allow.

Fourth. — Mining, in taking the risk involved in proving its initial investment as well as being deprived of any return on its investment during this period, and being a wasting industry, must obtain a higher rate of income, after the mine has been proven to be income-bearing property, than is obtained by other business in order to insure, before exhaustion, the same average return of income as other lines of industry.

Fifth. — To operate a producing mine requires extraction of ore and sale of its recoverable contents, which eventually exhausts the property. Therefore, to continue the life of the business and to keep the organization intact, requires that the same risk and uncertainty and delay in return on investment as in the beginning of the business must again be taken in the reinvestment in new properties before the exhaustion of each proven property. In the case of other lines of business that have an established trade it is simply a question of reinvesting the liquidated capital that was invested in stock, in the purchase of new stock of finished or raw materials, which, in the case of successful commercial enterprises, is done three or more times during each year's operation, without any hazard whatsoever.

In addition to the main points set forth above, mines are subject to accidents by fire, floods and cave-ins, of greater magnitude than is the case in other lines of business; this at times results in an operating loss even after the mine has been proven to be an income-earning property, and against which there is no insurance except in the case of accident to employees.

A proven property has not only to assume the risks and uncertainties above specified, which are not assumed by other lines of business, but must also bear the risks common to all business of fluctuations in the price of metals, wages of labor and cost of supplies, as well as strikes and acts of nature, which at times may result in a proven mine operating at a loss for any one period.

RELATIONSHIP OF ACCOUNTING TO THE BUSINESS

Accounting is not a collection of arbitrary forms, systems, etc., that can be applied to each and every business, but is the application of certain principles to the business by means of double entry bookkeeping, of mathematics, accounts, forms, records, and systems in such manner so as to determine and show the true condition of a business and the actual operating results for any one period of operation in costs and the profit or loss.

INTRODUCTION 3

As accounting is concerned with the results of each of the departments of the business and of the business as a whole, it is necessary first to have a clear understanding of the fundamental duties of each of the departments, which from an operating standpoint may be set forth, as follows:

The function of Engineering is to furnish the technical information necessary to production and to design, specify, improve and maintain the equipment, materials and products; Purchasing is the obtaining, transporting and storing of the materials; Superintendence is the application of the labor of the men and the use of the materials to the production of the product ; Selling is the advertising, disposition and distribution of the product; while Management is the coordination and regulation of all these operating departments into one harmonious, efficient working whole in conformity with the policies of the Executive Board.

Finance is the obtaining and disbursing of the money to procure men and materials necessary to carry on production, the disbursing of earnings, and the banking and investing of surplus earnings and capital returned from production; the Executive is concerned with determining policies and the bringing of the business into a harmonious working whole in conformity with the market conditions of supply and demand, etc., so as to achieve the greatest profit obtainable to the best interests of the business and of all its working parts. While the above definitions may not be theoretically correct, they concisely set forth the duties usually assigned to the different operating departments in mining organizations of the present time. Engineering is considered to include the geological, assaying, mechanical, and power departments.

In very large organizations there is the Advisory or Consulting Departments, covering the legal, technical and social or industrial sides of the business.

This brings us up to Accounting which is not concerned with any one department of work but with the accounting for the money, materials and product, and the showing of the results of each and every department of labor, both operating and administrative, and of the business as a whole.

The relation of Accounting to the Executive and Financial Departments is advisory, the same as Operating Engineering is to Purchasing, Production and Management. While Engineering is of first importance to Purchasing and Production, Accounting is of equal value to Engineering in Management, and is of first importance to Selling and Finance, as the determining of the profit is the thing of first importance to every business, and the showing of costs, earnings and the condition of each operating department of a producing mine is absolutely necessary to intelligent and efficient management.

Therefore, it can be readily understood that any treatise that will set forth the principles of accounting, as applied to mining more clearly and in a more practicable manner will be of great benefit to the business of mining.

ORGANIZATION OF THE BUSINESS

Before endeavoring to set forth the functions of one department of a business one must first have a distinct concept of the business as a whole, and of each department's relation to the other departments.

DIVISION AND DEPARTMENTAL UNITS OF A MINING ORGANIZATION

Market Conditions

Cube-Business

Operation i

I • Engineering ?= Purchasing 3 ( Production \Superintendenc

5- Management

Administratis

'on { a - Executive 6 ( b - Financial C -Accountira

Chart I.

The business of mining consists of the two grand divisions of Administration and Operation, and can be symbolized by a cube, the four sides representing the Operating Departments of:

Engineering

Purchasing

Production or Superintendence and the top Management, and the bottom the Administrative Departments of:

Executive

Financial and

Accounting

That upon which the cube, or business, rests is the market conditions. In a properly organized business, sufficiently large to require separate departmental organizations, each of these divisions will have its head. Nevertheless, the functions and work of each will be so intertwined as to make a consistent working whole. Also while each department will

INTRODUCTION 5

be concerned with its own duties, it will in a minor way within its own organization, exercise the functions of each and all of the other departments.

The Executive is represented in operations by the Management, which is symbolized by the top of the cube, and contacts all operating departments, while Finance is represented in operations by Accounting, which is symbolized by the bottom of the cube, and also contacts all operating departments.

Therefore, in a properly organized mining business the Accounting Department is generally divided into two divisions to conform to the Operating and Administrative sections of the business.

DEFINITION OF ACCOUNTING TERMS

As accounting is the language of business, there is great need of standardization in the use of all accounting terms and a clear definition as to the meaning of each term in order to do away with the present ambiguity in the statements of business and to fill the lack of uniform business data.

The effort has been made in the following pages to be uniform in the use of business and accounting terms and so to set forth the facts as to allow of clear concepts of the meaning of the usual terms.

NEED FOR BETTER UNDERSTANDING OF ACCOUNTING

In the production of its product, the business of mining requires the employment and utilization of men, money, machinery and materials, and the profitable operation of the business depends principally upon the intelligence, ability and cooperation of the men who constitute the executive, administrative and operative force, generally spoken of as Capital Management and Labor.

In the present day organizations, Capital, the Stockholders, is represented by the Board of Directors and the Financial and Accounting Departments; Management by the Executive Department the Manager and the heads of the Engineering, Purchasing, Superintendence and Selling Departments; while Labor has had little or no representation in the organization except as raw material, until recently.

The primary function of accounting is the recording, analyzing and distributing of the money, men, materials and product involved in the activities of each and every department of the business so as to show at set intervals the total net results of the business in costs and earnings and the true condition of the business, thereby keeping the whole organization informed of the facts. To do this, however, the principles of the accounting system in all its details must be based upon and be identical with the principles and organization of the business, otherwise a perfect photograph of the business in figures cannot be obtained. Therefore, the accounting system can be perfected only as the organization is perfected.

Considering the nature of accounting, it can be readily seen why uniformly efficient and intelligent accounting results in an organization of size is so difficult to obtain; also why it is necessary that all the accounting should be a complete unit and be under one head, and that this head should be familiar with all the details of the organization and business and that each of the operating heads should have at least a working knowledge of accounting. No other department of the organization requires such a broad knowledge of the business details and fundamentals, nor is so dependent upon the cooperation of the other departments in order to properly execute its work. The importance of accounting is shown by the fact that no department of the business can express the results of its activity, or carry on its work intelligently for any length of time, without the assistance of accounting, nor can the results of the business, nor its condition be shown except through accounting and costing.

Therefore, a knowledge of its basic principles is essential not only to the employees of the Accounting Department and to every departmental head of the business, but to every stockholder or person who relies upon the reports of directors and officers for his knowledge of the business in which he has invested his money.

Chapter II

General Accounting is the applying of the principles of accounts to a business so as to show the results of operations in profit or loss, and to obtain a true statement of the condition of the business at the end of each operating period.

PURPOSE OF ACCOUNTING

Mining is a business, the same as other industries, and is operated for the profit to be obtained therefrom. Therefore, proper accounting is as necessary to intelligent and profitable operation and management as proper engineering is to the efficient production of mining.

Accounting efficiency can not be obtained unless there is a definite idea of the results desired and of the methods of procedure. The purpose of accounting may be summarized, as follows:

1. To verify and check, analyze and record, the business transactions and the operations in such manner as to show at regular intervals a true, correct and intelligent statement of the condition of the business, and the results of operations in costs and earnings.

2. To furnish to the officers and to the different operating department heads the results of operations for each period, within such time as to enable them to utilize the knowledge obtained therefrom in the succeeding period.

3. To summarize and compare the results of the operations of each period and report to the Manager and Directors the fluctuations when compared with previous periods.

The check of the reports, statements, etc., of the business transactions and of the operations should determine the accuracy of each individual item, or operation, and the verification of each transaction or operation should be such as to reduce leaks, thefts, extravagances, omissions and misrepresentations to a minimum.

The Accounting Department is not to decide as to whether or not efficiency has been obtained in the different department operations, but is to report the actual results, conditions and fluctuations of the departmental operations to the management and to the executive in such manner as to enable them to ascertain whether or not efficiency is being obtained, and to furnish to the different department heads all the accounting information that may be necessary to assist each to obtain efficiency.

ORGANIZATION OF ACCOUNTING DEPARTMENT In order to conform with the general organization of mining operations, the accounting is usually divided into two departments.

1. Administrative Department.

2. Operating Department.

The Administrative or Corporate Department is concerned, first, with the accounting in connection with promotion and organization, and, finally, with the dissolution of the business. However, its principal concern is with the results of the Operating Department covering the development, the equipment, and the production of the mine property. The Administrative Department is under the direct supervision of the Secretary and the Treasurer of the company, and the indirect supervision of the Auditor or Comptroller.

In large business organizations of many branches or subsidiary organizations, the accounting that is usually done by the Treasurer and the Secretary, concerning the administrative side of the business is sometimes done under the supervision of a Comptroller who is the general head of the accounting, while the General Auditor is the head of the operating accounting and costs, etc., and his assistants are the auditors who verify the accounting work of the different operating organizations and departments.

The Operating Department is concerned with the details of the development, equipment and production operations of the mine and other property, and the transmitting of the results of operations to the Administrative Department. The Operating Department is generally directly under the Chief Clerk or Chief Accountant and indirectly under the Auditor.

The organization of the Accounting Department depends on the form of organization of the business, whether corporate, partnership, etc., the scale of operations, the method of mining and treatment of ores, and the disposition of the mine and smelter product. As the mining business is generally carried on in the corporate form the accounting methods, etc., set forth in this treatise will be those particularly applicable to a corporation.

The organization of the Operating Department may be a single unit under the Chief Clerk or Chief Accountant, with one set of books and records whose accounts are closed directly into the Administrative Department's books; or the organization may be of several units under an Accountant for each unit, with separate sets of books and records whose accounts are closed either into a set of general operating books and then into the Administrative or Corporate Department's books, or closed directly into the Administrative Department's books.

Again, the Mine Department may be the principal unit and the other departments, such as the Smelting, Refining, and Selling, etc., be sub-

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